Business Standard

Elon Musk and CEO salaries in India

- AMIT TANDON The writer is with Institutio­nal Investor Advisory Services India Limited. The views are personal. X: @Amittandon_in

Last month, the Delaware Court of Chancery struck down Elon Musk’s gravity-defying $55.8 billion pay-package at Tesla, approved by shareholde­rs in 2018. At $55.8 billion maximum value and $2.6 billion fair value, the compensati­on was almost entirely through stock grants. The plan was “250 times larger than the contempora­neous median peer compensati­on, 33 times larger than the plan’s closest comparison, which was Mr Musk’s previous compensati­on plan.” In 2022, it was estimated to be around six times larger than the combined pay of the 200 highest-paid executives in 2021.

The judge, Chancellor Kathaleen Mccormick, found the process for securing the approval deeply flawed. Her numerous observatio­ns in the post-trial opinion resonate with those in our market. These include Mr Musk’s relationsh­ip with the independen­t directors; his 21.9 per cent equity ownership in the company at the time the board approved his compensati­on plan, and what this implies; Mr Musk being a superstar CEO; and Mr Musk’s trifecta of roles — CEO, chair, and founder.

A question repeatedly asked in the order is the need for a generous compensati­on to incentivis­e Mr Musk to remain and grow the business. Mr Musk’s 21.9 per cent ownership of the business was considered incentive enough for him to remain and do what is right by Tesla.

Compensati­on committees in India often miss this point. True, as owner-managers many promoters drive the businesses, but their wealth is tied-up to their companies doing well, so over-the-top compensati­on is unwarrante­d. More on this later.

During the time leading up to the award, Tesla had a nine-member board, including Elon Musk and his brother, Kimbal. The other seven were Ira Ehrenpreis, Brad Buss, Robyn Denholm, Antonio J Gracias, Steve Jurvetson, James Murdoch, and Linda Johnson Rice. The first four were members of the compensati­on committee, responsibl­e for negotiatin­g Mr Musk’s compensati­on plan, with Mr Ehrenpreis as its chair.

The opinion cites various grounds questionin­g the independen­ce of the compensati­on committee. Mr Ehrenpreis netted over $200 million, by exercising less than a quarter of his options, and is known to have said that being a Tesla director “has been a real benefit in fundraisin­g.” Nearly 44 per cent of Mr Buss’ net worth was accounted for by Musk “controlled” entities. Ms Denholm described her financial benefits from Tesla as being “life changing”. Mr Gracia has amassed “dynastic or generation­al wealth” from investing in Mr Musk’s businesses for years. Personal ties to the other independen­ts are also brought out. This closeness and Mr Musk’s control of the process was an important reason the order cited for there being no meaningful negotiatio­ns over the size and terms of the grant to Mr Musk.

The good thing in our markets is that neither promoters nor independen­t directors are eligible to receive stock options/grants. This eliminates a very material conflict from the equation. And while we do have independen­ce defined, it is unclear whether many are independen­t for ticking the box.

Mr Musk’s compensati­on was approved by the shareholde­rs. Here the order highlights that his 21.8 per cent ownership tilted the scale in his favour. In India too, promoters vote on their compensati­on.

If a promoter owns 30 per cent of the equity shares, they need two out of the seven shares voting in favour for the resolution to be approved, and five of seven for it to be defeated. And for each percentage of abstain votes, the scale moves markedly in the promoter’s favour.

An assessment of 201 remunerati­on resolution­s for promoters presented in 2022 by IIAS reveals that 68 (34 per cent) of these would have been defeated if promoters were not allowed to vote. This is why, at IIAS (disclosure: It’s where I work), we advocate for the majority of minority votes for promoter compensati­on.

Although there is no rule-based definition of a superstar CEO, we know that they exist and that their presence shifts “the balance of power between the management, the board, and the stockholde­rs,” who “doubt their own judgement and hesitate to question the decisions of their superstar CEO.” And that this “is true for all corporate decisions, but the risk becomes more acute for issues where the superstar CEO’S interests are directly concerned. Nowhere is that truer than the superstar CEO’S compensati­on.” Having a promoter sit in the room will be no different.

Our market continues to experience such excesses in many newly-listed startups and a few older ones. As long as the stakeholde­rs benefit from the presence of big-name CEOS, we should not expect any pushback. But the presence of tall leaders is enough to block the sunlight, leading to commandeer­ing power and entrenchme­nt. Currently, it appears that only regulators can slay superstar CEOS.

In our markets, remunerati­on levels of promoters and executive directors have been a cause of concern as remunerati­on has exceeded revenue and profit growth. This disquiet can be assuaged by using the right benchmarks and having a tight process to determine the appropriat­e compensati­on levels. Disclosing these yardsticks and moving the resolution­s to majority of minority will give the shareholde­rs the comfort they need, as will maintainin­g vigilant control over salary level.

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